The start of the new year 2016 has been the roughest one on record for the stock market. Huge losses and investors are in a full panic. So where do you put your money that it will be safe and constantly give you good returns? Investment property or rental properties! It is a great way to build long term wealth as well as collect rent every month where someone is actually paying the note for you and hopefully if you did your calculations right, you make a nice spread. But how do you make sure before you purchase an investment property that you will make money on it? The answer is – “cap rate”.There is more to buying a rental property for an investment than just looking at the purchase price, how much the note is and how much you can rent it for. The savvy real estate investor takes a few other factors into consideration before pulling the trigger. The math involved isn’t that hard, but we have seen in the past newer investors skip this step and not make money like they should and be disappointed on dismal returns on their investment properties.So what is cap rate and how do you calculate it? It really is quite simple. Cap rate is the measurement of how much a property produces compared to how much it costs.I actually came across a great article that explains it probably better than I can from BiggerPockets.com written by Che Chiu Wong. Here is a little from the article –
Buying cash flow properties is one of the greatest ways to build wealth. To do this right, you have to buy smart. Run your numbers, that’s what we say. But how do I exactly do that? This is what we are going to explore. A good way to do this is to determine the Capitalization Rate of the property (Cap Rate in short).Capitalization Rate is a crucial indicator for real estate investing because it measures the rate of return on your investment, i.e. how much you get for your money’s worth. However, surprisingly, this concept is often misunderstood within the investment circle. If you ask 10 people what the Cap Rate is for a particular property, nine out of the 10 people will give you a different answer. The last one will ask, “What is cap rate again?”Jokes aside, the aim of this article is to clearly define what Cap Rate is all about, how and when you will use Cap Rate to analyze your deal, and why different people calculate Cap Rates differently. Learning to calculate and understand Cap Rate is a powerful tool for your real estate investing career.
What is Cap Rate?
In plain English, Cap Rate can be described as such:If you purchase an investment property ALL IN CASH, for each $100 you put in, how much is your profit per year after you have paid your expenses?The keywords are: “cash,” “profit per year,” and “after expenses.”CASH: It assumes cash, i.e. we don’t consider how a mortgage may change our return.PROFIT PER YEAR: It assumes there is regular income generated from this property.AFTER EXPENSES: It assumes there are expenses being associated with this property.Often, Cap Rate is represented in percentages. For example, instead of saying Property A’s Cap Rate is $7.50 per $100 invested, we will just say Cap Rate is 7.5%. It means the same thing
How is Cap Rate Used?
Cap Rate is mostly used to compare income-producing properties. It gives a unified gauge for you to compare, even if the properties are somewhat different.For example,
Property A: 2 units, rent = $2000/mo, selling for $250,000
Property B: 3 units, rent = $2500/mo, selling for $300,000It is quite difficult to determine which one is a better deal. Looking from a purchase price per unit standpoint, Property B seems cheaper ($100,000 vs. $125,000), whereas looking from a rent per purchase price standpoint, Property A looks better (8 per thousand vs. 7.667 per thousand). We don’t know what the associated expenses are for each property, further clouding our judgment.
Most investing decisions come down to math. Property evaluation is too complex without it. If you really understand the benefits and limitations of the most common investment equations, you’ll make better decisions, reduce your work load and be able to act quickly.
The best way to look at a cap rate is as a return on the value of a property. A 10% cap rate will give you 10% return on the value of the property over a single year after costs have been deducted.
How Cap Rates Work
For many investors, cap rates are the magic bullet. It’s the first thing they turn to when making decisions because it takes into account costs and income. While cap rates do give you a lot of information and help you compare properties, they also leave out a lot of information. Let’s get to the math so we can better understand how it works and how to avoid common mistakes.
Cap Rate = Net Operating Income/Value
NOI is the gross yearly income from a property minus the expenses (does not including mortgage payments, income taxes or depreciation).
Total of all rents and other income the property produces in a year
Vacancy loss (how much rent will you lose in an average year due to vacancies)Routine maintenance (yard work, painting, etc.)Property management feesProperty taxesAdvertisingUtilities that you pay for
- Property is valued at $250,000
- Rental income = $18,000 a year
- Vacancy loss averages 2% for your area = $18,000*.02 = $360 a year
- All expected maintenance = $1,200 a year
- No property manager, advertising or utility bills for this property
- Property taxes = $3,000 a year
- Cap rate = ($18,000 – $360 – $1,200 – $3,000)/$250,000 = 0.054 or 5.4% cap rate
How to Interpret Your Cap Rate
Cap rates are different everywhere you go. Because value (price) is part of the equation, cap rates are based on supply and demand in your local area. In the U.S. most real estate falls in the 5%-10% range. It is possible to do better, but it usually requires creative thinking.
Cap rates have three important uses.
- The cap rate can help you understand if a property is priced too high or low for an area. All you have to do is compare the cap rate from the property you are looking at to the average cap rate for the area. An above average cap rate for an area can be an indication of problems with the property.
- If you decide you won’t do a deal unless you get a certain cap rate, then you can use it to decide what price to offer.
- If you know the average NOI (cash flow) for this deal is going to be $30,000 a year and you will only do a deal with a cap rate of 8% or higher, then you should bid $30,000/.08 = $375,000 or less.
- If you know what cap rates are common in the area and and you know the asking price, you can get an idea of the Net Operating Expenses assuming cap rates were used to price the property.
- If the average cap rate in the area is 6% and the asking price is $300,000, then 0.06*$300,000 = $18,000 in expenses for the year.
So there you have it. It’s a lot of reading, but once you get a grasp on it, it’s not that hard to do and very useful information on helping you decide on whether or not. If you still aren’t sure how to do it, join a REIA and attend some meetings and ask some other investors that have been around awhile. You can also do more searches on the internet and find all kinds of information about the subject.
Well, it’s already the end of 2015. Seems like the year just started. But as this year comes to a close it is time to start thinking about your investment strategies for the coming year of 2016.According to Realtor.com, 2016 is going to be another great year for the real estate market in the Atlanta area. In fact, Atlanta made the top 5! Atlanta has been a hot market and continues to be a hot market. Some of the factors for this is a steady and growing job market, as well as the cost of living lower than some other areas of the country including the prices of homes.This is great news for investors. Of course this is great news for investors that fix and flip for a retail sale, but also for the buy and hold investors. Not all of the people moving to Atlanta will find a home right away, or even be able to afford a home when they first move here because they need to sell their property somewhere else in the country. This means they will end up renting until they are able or find that perfect home in the area that they want.Here is a snippet from the article – Smoke and his team took past trends and seasonal variations of housing and economic data for the 100 largest markets in the country and stuck them into a time machine—oops, we mean a statistical model that predicts future values for home sales and prices. Then they identified the markets whose forecasted growth was equal to or better than the U.S. average. The resulting top 10 list is of the real estate markets that look the most bullish for the coming year. Get ready for a few surprises!Many of the markets that have consistently made our “hot list” because of high demand from buyers and quick sales didn’t make the cut for 2016, because they are predicted to see slower price appreciation and even declining sales. Notably, they include the greater metro areas of San Francisco, Denver, and Dallas.In addition, each of the markets on the list is in high demand, with 60% more listing page views than the U.S. overall and inventory that sells 16 days faster than the U.S. average. Surging demand in each market can be attributed to growing household formation, a prosperous job market, and low unemployment rates as well as large populations of key demographics. Older millennials (25 to 34 years old), younger Gen Xers (35 to 44 years old), and retirees (65 to 74 years old) will be driving home sales in 2016.Read the full article here: http://ift.tt/1RtnSaIOf course being able to profit from this trend isn’t as easy as just looking at the homes that are listed on the MLS to find fix and flip properties or to turn into rentals. Most of the homes listed are at the high end of retail, which means there is no room for a retail flip. Investors need a place to turn to find properties. We are the solution! If you are looking for a constant stream of great off market properties here in the Atlanta area be sure and check out our site of available investment properties at ThisCheapHouse.com.
Yes it’s true! Even though we are one of the largest and best Atlanta area wholesaling companies, we still will occasionally buy properties from other wholesalers. You may wonder why we would consider buying from another wholesaler? Because a deal is a deal no matter where the deal originates. Many direct wholesalers spend considerable money on marketing techniques which can allow them to pick up off-market deals that a smaller investor would not have access too. Because this is our primary business we completely understand that a wholesaler is in business to make a reasonable profit for the deal that they may have spent $1000’s in acquiring such deal. Let me give you an example of one of my favorite purchases from an area wholesaler. I now refer to this deal as my “free” house.Back in 2011 I received a flyer from a small local wholesaler advertising a very basic 3 bedroom/2 bathroom home in Lithonia, Georgia. The flyer reflected a house that had obviously been vacant for several months or maybe even years. Weeds had grown up almost completely hiding the house, the gutters had small trees growing from them and the inside had obviously been somewhat vandalized. The list price of this subject deal was an amazing low price of only $17,000 cash. Now many investor buyers would have immediately starting trying to negotiate a lower purchase price. On the other hand we immediately agreed to a full price offer to lock up the deal and directly headed out to the subject property. Now it is true the house needed considerable work but we quickly recognized the overall potential of the deal so we moved forward with providing non-refundable earnest money and moved the deal to closing. A valuable lesson with this scenario is when you see a potential deal, move quickly and don’t try to low ball the wholesaler if it’s a deal.I remember actually telling this particular wholesaler that I hoped he made a significant profit on the deal as I was so pleased with my numbers. Turns out the wholesale did make a $10,000 profit on the deal which is very significant, especially for this priced house. Was I upset at their significant pay day? Heck no, I loved my deal! Many times we receive low offers on our subject deals that provide us no profit and these potential buyers end up losing great deals. I have actually gone back to these buyers on occasions and have asked the question, “did you not like the deal at our list price” and most times the answer is well yes it was a great deal at your list price! So if such a great deal why try to get the deal at an even lower price resulting in not succeeding in buying? Remember RE investing purchases should not be an emotional decision based upon one winner and one loser in the transaction, but should be determine strictly on the numbers. If the numbers work for your individual strategy, pull the trigger and move the deal forward!Now back to this particular deal, we ended up spending $13,000 to renovate the property back to rent ready condition. You see even though the yard was so overgrown that it was hard to see the house, we knew this was not a significant cost. So now we own a 3/2 home in a nice family neighborhood at a cost base of only $30,000. Now to make this deal even sweeter, this particular house was purchased by our self-directed Roth IRA so all future profits are tax free! Since this purchase, the house has been rented at a below market rent rate of $750/mth so the proceeds have now completely paid back our initial $30,000 investment. Thus the reason I refer to this as my “free” house! In addition with recent market appreciation our little free house now has a market value of $60,000 and I am confident that within the next 5 years our little free house will be worth $100,000! How many of these type deals do you need to be financially free? This example is how you truly create wealth investing in real estate. So remember when you see one of our deals that makes sense, take action. Negotiate if you wish, but realize don’t lose a potential $100,000 free house just to save a couple $1000’s. That’s just bad business!If we can help you with similar types of strategies give us a call, we are here to help you succeed!Now go buy some houses you will be glad you did!Click Here To Check Out Our Off Market Atlanta Wholesale Properties Here.
It is a great time to be a land lord and also to be expanding your rental property portfolio. Rents are on the rise nation wide and there seems to be a shift from home ownership to renters.Investing in rental properties has always been a fantastic way to create wealth, especially generational wealth for your family. Even when you take into account the crash of ’07-’09, investors that had rental homes really only saw losses on paper. In many cases these properties are back to what they were valued at before the crash, if not higher, depending on what part of the country the property is in.Because of this, it can be argued that buying investment properties for rentals is safer than buying properties for fix and flip for a retail sale. There are investors that warn of another bubble, and if it happens while you are in the middle of a fix and flip, then you could suffer some great losses. While on the other hand, if you own rentals, you just keep renting the properties out and collect rent. Historically, the housing market always comes back, and when it does, that is when you can liquidate an investment property if you should so desire.We found this great article and interview of Barry Sternlicht, CEO of Starwood Capital from CNBC and though we would share it. And if you are an investor looking for rentals in and around Atlanta check out our site, ThisCheapHouse.com for investment properties that are deeply discounted.
This is the next big property investment
Check us out and our new video! It will be posted tomorrow (09/04/15). If you want to learn more about us and how we can help your real estate investment business, you definitely want to check this out!
It is a great time to be investing in Real Estate! If you are an investor that buys for fix and flip for a quick profit – we can help. If you are an investor that is looking for investment properties, or rentals – we can help! We want to be the #1 supplier for wholesale investment properties throughout the Atlanta area.
A lot more people are considering engaging in the field of real estate investing in an effort to generate profits. Flipping property in Atlanta is definitely an effective way of earning cash, although the investing arenas are more competitive now compared to what they were not long ago, so anyone that is letting you know that it is ‘easy’ is either mistaken or selling something themselves – for instance a real estate investing sales course!
There are several challenges related to flipping real-estate for money. The initial thing you need to remember is the fact not all properties will be worth buying. While a great deal of properties can be acquired, done up, and sold, some – many, actually – require much too much work to make it worthwhile. In those cases, you will be better off passing up those properties.
Also, there are a lot of costs associated with getting a property along with selling it off on the backend. Those costs, such as closing costs on the backend, are things that people often forget while they are investigating the opportunity of property flipping. Ensure that you have a good idea of how the market works – as well as the timescales you are working with – before you invest in a property.
For those who have never sold a home before then you certainly should begin with an affordable property in the Atlanta area you know well, and just try property flipping if you have substantial savings that you simply don’t mind keeping tied up in property should you be unable to sell the home in a reasonable timescale.
In order to generate profits, you should do a lot of research and put in the legwork – you need to know what you are getting into before purchasing a property, and if you can, invest in a property you can purchase from another investor you trust that has been investing for some time as to lessen the odds of you loosing money.
Before you try flipping, maybe try and attend some Real Estate Investor Meetings, so that you can understand more about the Atlanta area and acquire an understanding for property prices and trends. Working under somebody else, or maybe even acting for an agent may minimize the rewards, but it also lessens the risks while you “learn the ropes”. Then, when you find yourself well informed, you can start to be effective on building your own personal real estate property business and doing real property flipping at the same time.
Our real estate investment firm, This Great House LLC, has been in business for 15 years, both in flipping for profit and rental properties. To see our list of investment properties that we have for sale please have a look at out site www.ThisCheapHouse.com
Do you own a house? If not, you should consider purchasing one. Should you already be a homeowner, you ought to look into purchasing more properties. The real estate market could be complex but purchasing a property is amongst the most ideal ways to invest your hard earned dollars. Listed below are 3 good reasons to get into real-estate.
Firstly, a property or perhaps a rental property is the best way to diversify your investments. If you currently have some stocks, bonds and other investment products, you ought to explore purchasing other sorts of investments. The intention of diversifying your investment portfolio is to avoid losing a lot if your market will not perform well. As an illustration, getting a home is a great way to protect your portfolio in case the stock trading crashes. Real estate is perfect for diversification since it is a tangible investment. If something affects financial markets, odds are the real estate market will never suffer. Actually, the need for real estate property may possibly climb if investors will not see other markets as a great choice to shell out their money.
Investing in rental property can be ways to generate more earnings. If you have a property, choosing a rental property means you could potentially produce a monthly income by collecting rent. There are numerous points to consider before getting a rental property, for example the location and the average rent in the area. Additionally, you will must account for expenses like closing fees, repairs and maintenance. Being a landlord may be time-consuming and stressful from time to time but you will notice that owning a rental property can be very interesting. You may also use the income you get to get more rental properties.
A property is a good investment as it is thought to be equity. This means you can borrow against it if you find yourself inside a bad financial situation or would like to finance another project. You could as an example equity in a home and finance it to be able to afford to buy a rental property. It is actually easy to borrow against a property of the value of the home you hold, for example if you want money for an emergency.
These are among the best reasons to get into real-estate. Spend some time to do more research about this market and make certain you invest in the proper property.
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